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ILRHR4631 Week 7 Lecture

ILRHR4631 Week 7 Lecture - Managing Compensation Managing...

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Unformatted text preview: Managing Compensation Managing Spring 2009 ILRHR 4631 Week 7 Lecture Charles G. Tharp Employee Benefits Employee Areas to Cover Over the Next 2 Weeks Areas Why the Growth in Employee Benefits? Value of Employee Benefits Key Issues in Benefit Planning, Design and Key Administration Administration Components of a Benefits Plan Funding Benefits Accounting and Expense Benefit Laws Voluntary vs. Mandated Benefits Qualified vs. Nonqualified Benefits What Are Employee Benefits? What That part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer payments, e.g. life insurance, pension, workers’ compensation, vacation Benefits can be “contributory” or “non­ contributory” Stakeholder Views of Employee Benefits Stakeholder How do these different stakeholders view employee How benefits? benefits? Society? Workers? Government? Hospitals, Doctors and Insurance Companies? Strategic Reasons for Offering Benefits Strategic Help attract employees Help retain employees Elevate the image of the organization with employees and other Elevate organizations organizations Increase job satisfaction Protect employers’ investment in workers Changes in Benefit Costs Over Time Changes What factors have driven these changes? Factors Influencing the Growth in Factors Employee Benefits Employee What factors have influenced the growth in employer-sponsored/provided benefits over the last several decades? last What factors have slowed the growth in the What offering of employer-paid benefits over recent years? years? What are some of the ways employers have What attempted to control benefits costs? attempted Factors Influencing the Growth in Factors Employee Benefits Employee Wage and Price Controls during WWII Wage Employers competing for talent Union negotiations/Union avoidance Government mandates Government encouragement Cost­effectiveness/tax­effectiveness of employer provided benefits Factors have slowed the growth employer-paid benefits employer-paid Dramatic cost increases Dramatic Aging Technology Utilization Global competition Global Change in accounting rules Change Increased life span post-retirement Increased Increased turnover/multi-employer careers Increased Growth in employee pay all benefits Growth Flexible benefits and the separation of what is offered by the employer vs. what the employer subsidizes by Value of Employee Benefits Value Employees: Expect benefits as part of their total compensation Do not understand true value of benefits Often undervalue their benefits Often take benefits for granted Often cannot list all benefits received Have preferences regarding types of benefits they Have want want Key Issues in Benefit Planning, Design, Key and Administration Benefits Planning and Design Issues How to attract good employees How to deal with undesirable turnover Integrating benefits with other compensation Integrating components components Strategies for ensuring external competitiveness Ensuring that benefits are adequate Whether employee benefits are cost justified Benefits and Total Compensation Benefits What is expected from benefits? What is an appropriate mix of benefits? How much total compensation, including How benefits, should be provided? benefits, What part should benefits comprise of the total What compensation system? compensation What expense levels are acceptable for each What benefit offered? benefit Benefits and Total Compensation (continued) (continued) Which employees should be given or offered Which which benefits? which Why is each type of benefit offered? What is being received in return for each benefit? How does having a comprehensive benefits How package aid in minimizing turnover or maximizing recruiting and retention of employees? employees? How flexible should the package of benefits be? Benefit Administration Issues Benefit Who should be protected or benefited? Series of questions need to be addressed How much choice should employees have among How an array of benefits? an Concerns choice (flexibility) in plan coverage Adverse selection Standard benefit package “Cafeteria-style,” or flexible, benefit plans Benefit Administration Issues (cont.) Benefit How issues associated with flexibility should How benefits be financed? benefits Noncontributory Contributory Contributory Employee financed Are your benefits legally defensible? Are Financing Benefits Plans: Alternatives Financing Non-contributory Employer pays total costs Contributory Costs shared between employer and employee Employee financed Employee pays total costs for some benefits By law the organization must bear the cost for some By benefits benefits Key Benefits Legislation Key Health Maintenance Act 1973 Must offer HMOs Employee Retirement Income Employee Security Act (ERISA) 1974 Security Vesting Funding Communication Non-discrimination Tax Reform Act 1986 401(k) COBRA 1984 Benefits Continuation Family Medical Leave Act Family (FMLA) 1993 (FMLA) Work/life issues Tax Reform Act 1982 IRA Categorization of Employee Benefits Categorization 1. Legally required payments (employers’ share) a. b. c. OASDI (employer FICA taxes) and railroad retirement tax Unemployment compensation Worker’s compensation Defined benefit pension plan contributions (401K type) Defined contribution plan payments Profit sharing Stock bonus and employee stock ownership plans (ESOP) Pension plan premiums Administrative and other costs 2. Retirement and savings plan payments (employers’ share) a. b. c. d. e. f. Categorization of Employee Benefits (continued) (continued) 1. 2. Life insurance and death benefits (employers’ share) Medical and medical-related benefit payments (employers’ Medical share) share) a. b. c. d. e. f. Hospital, surgical, medical, and major medical insurance Retiree hospital, surgical, medical, and major medical Retiree insurance insurance Short-term disability, sickness, or accident insurance Long-term disability or wage continuation Dental insurance Other medical insurance / medical benefits 3. Paid rest periods, coffee breaks, lunch periods, wash-up Paid time, travel time, clothes-change time, get-ready time, etc. time, Categorization of Employee Benefits (continued) (continued) 1. Payments for time not worked a. b. c. d. e. Payments for or in lieu of vacations Payments for or in lieu of holidays Sick leave pay Parental leave (maternity and paternity leave payments) Other (jury duty, military leave, funeral leave) Discounts on goods and services purchased from company Discounts by employees by Employee meals furnished by company Employee education expenditures Child care Other 2. Miscellaneous benefit payments a. b. c. d. e. Legally Required Benefits Legally Workers Compensation Social Security Unemployment Insurance Family and Medical Leave Act (FMLA) Consolidated Omnibus Budget Reconciliation Consolidated Act (COBRA) Act Workers’ Compensation Workers’ What is the purpose of Workers’ Compensation? Workers’ Compensation Workers’ Laws date back to 1911 Based on the principle of liability without fault Employer absolutely liable for providing benefits Employer to employees that result from occupational disabilities or injuries regardless of fault disabilities Employers assume costs of occupational injuries Employers and accidents and Workers’ Compensation (continued) (continued) Employers pay premium to insurance company or Employers state fund state Disability must be work related Benefits include: medical care disability income rehabilitation death benefits Commonalities in State Workers’ Compensation Laws Compensation ISSUE Type of law Selfinsurance Coverage MOST COMMON STATE PROVISION Compulsory (in 47 states) Elective (in 3 states) Self-insurance permitted (in 48 states) All industrial employment Farm labor, domestic servants, and casual employees usually exempted Compulsory for all (or most) public sector employees (in 47 states) Occupationa Coverage for all diseases arising out of and in the l diseases course of employment No compensation for “ordinary diseases of life” Benefits by Type of Injury: New Hampshire Hampshire Social Security Social What is the purpose of Social Security? Social Security and Medicare Social SOCIAL SECURITY Retirement income Disability benefits Death benefits Survivor’s benefits 6.2% of eligible earnings up 6.2% to to $106,800 Max individual contribution is Max $6,621.60 $6,621.60 Employee and employer Employee funded funded MEDICARE Hospital insurance (Medicare, Hospital Part A) Part Medical Insurance (Medicare, Medical Part B) Part 1.45% of eligible earnings 1.45% (unlimited) (unlimited) Employee and employer Employee funded funded 2.90% combined 12.4% combined Issues: Social Security Issues: Number of retired workers is rising without a Number corresponding increase in number of contributors to offset costs to Currently, 3.5 workers pay into system for each person Currently, collecting benefits collecting Within next 40 years this ratio drops to about 2 to 1 Issues: Social Security (Cont.) Issues: Reform options: Increase payroll taxes Decrease benefits Use general revenues Have social security go to an employee’s own Have account to be earmarked of his/her personal retirement retirement Benefits under Social Security Benefits Old age or disability benefits Benefits for dependents of retired or disabled Benefits workers workers Benefits for surviving family members of a Benefits deceased worker, and Lump sum death payments Unemployment Insurance Unemployment What is the purpose of unemployment insurance? Unemployment Insurance Unemployment Unemployment insurance benefits are Unemployment financed by federal and state taxes levied on employers under the Federal Unemployment Tax Act (FUTA) (FUTA) Employers pay 6.2% on first $7,000 earned Employers by each employee ($434) by 5.4% is disbursed to state unemployment 5.4% commissions ($378) commissions 0.8% for federal admin costs ($56) Unemployment Insurance (continued) (continued) Each company pays an actual rate depending on Each its prior experience with unemployment (5 year period) period) Money held in federal trust for each state Each state pays benefits (SUTA) Each (SUTA) Payments generally continue for 26 weeks Supplemental unemployment benefits for an Supplemental additional 13 weeks additional Unemployment Insurance (continued) (continued) Eligibility in most states: Be available and actively seeking work Not refuse suitable employment Not have left job voluntarily Not be unemployed because of labor dispute Not have been terminated for gross misconduct Consolidated Omnibus Budget Reconciliation Act (C.O.B.R.A.) (C.O.B.R.A.) What is the intended purpose of COBRA? Consolidated Omnibus Budget Reconciliation Act (C.O.B.R.A.) (C.O.B.R.A.) Coverage: Employers with 20 or more employees Employers Qualifying event coverage: 18 months to 36 months 18 Coverage stops: When employee becomes eligible for medical insurance from new employer or gains Medicare coverage Medicare Cost: Cost of insurance plus 2% Cost Family and Medical Leave Act Family What is the purpose of FMLA? Family and Medical Leave Act Family Coverage: Employers with 50 or more employees employees Eligibility: 12 months employment with employer in which employee works 1,250 hrs employer Qualifying events: Under four specific circumstances circumstances Conditions: Employee must be able to return to same job or one with equal status same Family and Medical Leave Act (continued) (continued) Health benefits: Continue while employee is on leave leave Exemption for key employees: Reinstatement to former position may not be required former Notification: 30 days 30 Retirement and Savings Plan Payments Retirement Defined benefit plans Defined contribution Defined plans plans The Employee Retirement The Income Security Act (E.R.I.S.A.) (E.R.I.S.A.) How Much Retirement Income to Provide? Provide? What level of retirement income should be set as What a target? target? Should social security benefits be factored in Should when considering level of retirement income? when Should other post-retirement income sources be Should integrated with pension? integrated How large a role should seniority play in How determining pension level? determining What can a company afford? What Employee Retirement Income Security Act (E.R.I.S.A.) (1 of 2) (E.R.I.S.A.) (1 What is the purpose of ERISA? Employee Retirement Income Security Act (E.R.I.S.A.) (1 of 2) (E.R.I.S.A.) (1 Eligibility: Employees at least 21 years old and completed one year of service completed Vesting: Cliff vs. graded Cliff Year of service: 12 months of employment with employer in which employee works 1,000 hours employer Fiduciary responsibilities: “Prudent-person” rule rule Employee Retirement Income Security Act (E.R.I.S.A.) (2 of 2) (E.R.I.S.A.) (2 Funding requirements: Specified in act Specified Plan documentation: Summary plan description distributed to all participants distributed Reporting: Annual Report Form 5500 filed with IRS IRS Pension Benefit Guaranty Corporation Pension (PBGC): Insures payment of certain pension plan (PBGC): benefits benefits Characteristics of Qualified Plans Characteristics To qualify under ERISA, a pension plan must: Be in writing and be communicated to employees Be established for the exclusive benefit of employees Be or their beneficiaries or Satisfy certain rules concerning eligibility, vesting, Satisfy and funding and Not discriminate in favor of officers, share-holders, or Not highly compensated employees. highly Qualified Plans (continued) (continued) Qualified Tax Benefits: Employer receives an immediate tax deduction Employer for contributions for The earnings accumulate tax deferred until The withdrawn withdrawn The employee pays taxes on the funds only when The the benefits are received the Types: Defined Benefits Plans and Defined Contribution Plans Defined Benefit Plans Defined Employer agrees to provide a specific level of Employer retirement pension, expressed as either a: retirement fixed dollar, or percentage-of-earnings amount that may vary percentage-of-earnings (increase) with years of seniority in the company. (increase) Employer finances this obligation by: following an actuarially determined benefits formula making current payments that will yield the future making pension benefit for a retiring employee. pension Defined Contribution Plans Defined Require specific contributions by employer. Final benefit received by employees is unknown Dependent on the investment success of plan manager Two popular forms of these plans: 401 (k) plan Employee Stock Ownership Plan (ESOP) Profit sharing can be considered a defined Profit contribution plan if the distribution of profits is delayed until retirement. delayed Defined Contribution Plans Defined Movement in and out of company stock in a Movement savings plan are sometimes suspended savings “black out” periods Due to administration issues Enron has prompted proposed reforms in savings Enron plans plans 30 day advance notice of black out periods No executive stock sales during black outs Questions as to the wisdom of allowing company Questions stock matches stock Focus on flexibility and diversification of match Relative Advantage of Different Pension Alternatives Pension DEFINED BENEFIT PLAN 1. Provides an explicit benefit which is easily communicated 2. Company absorbs risk associated with changes in inflation and interest rates which affect cost 3. More favorable to long service employees 4. Employer costs unknown DEFINED CONTRIBUTION PLAN Unknown benefit level is difficult to communicate Employees assume these risks More favorable to short-term employees Employer costs known up front Qualified Plan Limits Qualified Defined benefit, Defined Contribution, 401(k) Defined plans and other retirement plans have “limitations” on the amount of benefit that can be provided and the amount of pay that can be considered for benefit calculations. considered Why do these limitations exist? What is the social rationale? What is the economic rationale? Qualified Deferred Compensation Limitations on Qualified Deferrals Annual Benefit Limitation (Section 415(b)(1) (A)&(B)) – Defined Benefit Limit $195,000 – Defined Contribution Limit $49,000 » 401(k) Limit $16,500 Annual Compensation Limitation (Section Annual 401(a)(17)) 401(a)(17)) – $245,000 Highly Compensated Employees (DHC) Highly $110,000 in salary $110,000 54 Deferred Compensation Qualified deferrals Favorable tax, funding and accounting treatment Non-qualified deferrals Not encouraged or advantaged by the tax code 55 Income Protection Income Disability Protection Non-occupationally related Short-term Long-term Typical designs Flat dollar Multiples of compensation Other Forms of Income Other Protection Protection Life Insurance Severance Package Supplemental Unemployment Supplemental Benefits Benefits Covers nursing home or home Covers assistance assistance Employee pays all Buys a certain dollar per day of Buys care benefit care Katz limitations on the activities Katz of daily living of Long-term Care Insurance Tax implications Dependent life insurance Spousal life insuracne Life Insurance Protection Life Salary continuation Group life insurance Dependent group life insurance Health and Medical Benefits Health Medical Medical Dental Dental Vision Vision Short-term disability coverage Short-term Long-term disability coverage Long-term Health and Medical Benefits: Health Payment Mechanisms Indemnity (fee for service) You play - - you pay Advantages Greatest freedom of choice for individual Fewer “middlemen” Disadvantages Greatest cost Over-utilization Cost-sharing Premium Deductible Copay Out of pocket max Covered and non-covered expenses/U&C reimbursement rate Health and Medical Benefits Health Payment Mechanisms (continued) (continued) Managed Care Networks of Providers May allow out of network service at higher May cost to the employee cost Advantages Less costly Typically provide greater benefits (including Typically preventative) preventative) Disadvantages Under-utilization Health and Medical Benefits: Health Managed Care Health Maintenance Organizations (HMO’s) Two Models Staff (or clinic) model Individual provider association (IPA) Gatekeeper Primary care physician Types of Health Care Funding Types Fully Insured Partially Self-Funded Third-Party Administrator Self-Insured Health Insurance Purchasing Cooperatives Claims Processing Claims Claims processor must: Determine whether the act has, in fact, occurred Determine if the employee is eligible for the benefit Calculate the payment level Most companies have a third-party administer Most and adjudicate benefits, even if the company is self-insured. self-insured. Why? Employer Health Costs Employer Total health costs for the country are over $2.4 Total trillion trillion 17% of GDP (up from 9% in 1980) One of the fastest growing expenses for most One employers employers Growing at double the rate of inflation 46 million Americans are uninsured Government pays roughly 45% of health costs Private sources, mainly employers, pay 55% of Private costs costs Controlling Health Care Costs Controlling What steps can employers take to reduce health What care cost inflation? care Basic Primer of Cost Containment Terminology Terminology Ways in which employers have attempted to control benefits costs control Increased employee cost-sharing Increased Coordination of benefits Coordination Pre-tax spending accounts Pre-tax Opt-out provisions Opt-out Utilization review Utilization Managed Care/Network of Providers Managed Lower subsidies for dependents Lower Stricter audits of dependents and eligibility Stricter Changes in U&C standards Changes More out-patient procedures More Eliminate retiree health care/service-based contributions Eliminate Generics and mail order drugs Trends Related to Cost Containment Trends Probationary periods Benefit limitations (lifestyle benefits, experimental and elective proced...
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